The Real Threat to Australia from the Ongoing Trade Wars

The Real Threat to Australia from the Ongoing Trade Wars

Trade protectionist policies never end well.

In spite of this, US President Donald Trump is convinced he’ll return jobs to America as he attempts to end China’s reign as the manufacturing hub of the 21st century.

Yet the very people Trump reckons he’s out to save are the ones that are going to suffer most from the trade wars.

A little over 70% of US gross domestic product comes from consumption. Every single price increase on goods imported from China will hit cash-strapped American consumers. In many cases, the same consumers who voted Trump in to bring back their manufacturing jobs.

But the trade wars won’t only affect the US or China.

In fact, it could hit the Aussie economy much harder than either of those two nations…

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Taking advantage of its vast population, Chinese authorities turned China into the manufacturing powerhouse of the world starting in the late 1970s.

The rise in employment opportunities meant families left farms in search of jobs found in the newly-built urban centres during the 1990s.

By the end of that decade, a new Chinese generation took hold. One that didn’t need to work on a farm or factory. A generation with access to education, cushy office gigs and spending money.

It took 40 years of careful management — through shaky loans and fixing the yuan at a much lower value — but the end result was that China created a mass consumer economy the likes of which had never been seen.

China has the largest retail market in the world (in US dollars)

Source: Bloomberg

In less than two decades, Chinese consumption has blown out to US$6 trillion (AU$8 trillion).

By contrast, it took the US decades to become the world’s biggest retail market…and China did it in less than 16 years.

This has created a seismic shift in buying power from west to east.

But there’s a catch:

Consumers in the highly-managed Chinese economy can only buy what authorities allow foreign companies to sell.

Right now, much of the trade war is focused on what goods will get taxed.

One outcome of this is that, from Australia’s perspective, there is a fear the trade wars will reduce Chinese demand for Aussie minerals.

And that’s true.

A slowdown in Chinese economic growth would see the amount of Australian resources the Middle Kingdom purchases from us drop off.

It would likely result in the share price of one or two Aussie mining companies taking a hit.

But the bigger picture has much direr consequences…

The real fallout for Australia is losing the Chinese consumer that comes to our shores.

Chinese tourists add $1.3 billion to the Aussie economy. That’s more the $1.2 billion from every other country combined.

Then there’s the fact that we rake in almost $5 billion through international students.

And that China buys roughly $9 billion in Australian agricultural produce.

Those three industries combined make up 20% of our total $100 billion in yearly exports to China.

These goods aren’t being purchased by some giant state-owned conglomerate.

They’re bought by people

People sending their kids to Australia for an education or to buy our milk.

People with a newfound wealth to buy luxuries…like foreign-branded baby formula. Or Australian beef. Or Aussie wine.

People who, until recently, had very limited purchasing power.

Our economy has become reliant on the consumption cycle that depends on the influx of wealth into China. Through China’s economic engineering, Australia now relies on the power of the Chinese consumer to support the economy.

But our goods can only cross into China if the Chinese government gives the OK.

In truth, the Australian economy is less reliant on exporting resources than you may think.

The real double-edged sword for the Aussie economy is that the Chinese government allows its people to buy from us.

Why?

On the one hand, they bring tens of billions of dollars into the economy.

At the same time, those funds can be cut off at the drop of a hat.

You see, the greatest threat to Australia from the trade war isn’t that it will end the demand for our raw minerals.

The most powerful weapon China has is to direct its people to buy their goods elsewhere.

That one move would wipe $100 billion from Australia’s income.

Good luck finding a replacement for that.

Kind regards,

Shae Russell Signature

Shae Russell,
Editor, The Daily Reckoning Australia